Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

Origin of Bank
Most of the authors are of the opinion that the word bank has been derived from Italian
word ‘banco’ /‘banca’ or French word ‘benque’, meaning a bench.
Other writers opine that the origin of the word bank is the German word ‘banke’, which
means a heap of anything or joint stock fund
The origin of the word bank lies in the city of Italy , where the Lombard Jews were used to keep
benches in the market place to transact the business.
Italian word for the bench is banco. Such banco arrangements were used to be made for smooth
exchange of money and other bills of the business.
From those banco arrangements, people used to call them as the banco personnel or the banco
area or some specific banco.
Gradually, with the mix up of the population and spreading the banco styled business, same
banco word started giving rise to the bank (by stylish pronunciation).
Later on, when the financial organizations started to function with the similar objectives, people
gave them the name banco and then the bank.

What is Bank?
Bank is any financial Institution that receives collects, transfers, lands, invests or safeguards
money for customer.
An institution which does most or all of the following:
“safekeeping of money, conversion of domestic into and from foreign currencies, lending of
money at interest, and acceptance of bills of exchange, receives demand deposits and time
deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes
loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks;
and issues drafts and cash. An institution where one can place and borrow money and take care
of financial affairs”

In other words, a safe and guaranteed place of storage for and retrieval of important items or
goods.
According to Wikipedia –
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Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

A bank is a financial institution that accepts deposits and channels those deposits into lending
activities.
According to dictionary of Banking and Fianace:
“Bank is an organization chartered by the state or federal govt. principle function of which are

 To receive demand deposits and pay customers cheques drawn against them.
 To receive time deposits and pay interest thereon
 To discount notes make loan and invest in govt. and other securities
 To collect cheques, draft, notes etc
 To issue drafts and cashier’s cheques,
 To certify depositors cheques and
 When authorized by a chartering govt. it may act in fiduciary capacity.

Objective of banking business- owner’s, client’s and government’s point of view:

Objective of banking business- owner’s view point

 Earning profits: main objective. Through transaction

 Good will: by spreading banking business
 Raising efficiency: efficient banking system is necessary for maximizing profit.
 Rendering services: it gives various services to public and government.
 Investment of capital: proper investment of owner’s, share holder’s capital is also a major
objective of a bank.
Objective of banking business- government’s point of view:

 Issue of notes and currencies: bank plays the role of issuing notes, currency circulation
and preservation as a medium of transaction.
 Capital formation: banks encourage mass people to save. Small savings turns into
capital. This capital is used in building industries and many development works.
 Money market control: banks try to control money and credit market in order to bring
stability in commodity price.
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 Employment:
Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

 Advice in financial matters: another objective of a bank is to provide necessary data of

the country and proper advice to the government.
Objective of banking business- bank client’s point of view:

 Deposits:
 Safety:
 Advice and consultation
 Representative and trustee:
 Raising living standard:

Basic principles of Bank Business:

1. Principle of Adequacy or Solvency:

2. Principle of Profitability:
3. Principle of Safety:
4. Principle of Liquidity:
5. Principle of Honesty and Reliability:
6. Principle of efficiency:
7. Principle of economy:
8. Principle of services
9. Principle of publicity: world’s local bank (HSBC). Bank should advertise its products to
the people. In this way they can expand their business.

1. Principle of secrecy: bank should maintain secrecy its client’s account.

2. Principle of localization: bank should open its branch at client’s convenience.
3. Principle of beware ness: this principle should be followed. Bank can avoid risk and
uncertainty of their investment by judging client’s honesty, capacity of repayment and
valuing collateral.
4. Principle of specialization: a bank should follow the principle of specialization in case
of foreign trade, credit facility or issuing notes. In this way they can increase their
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efficiency.
Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

5. Principle of management: bank’s success depends a lot on efficient and quality

management. So there should be a training facility for the officers and workers of the
bank to raise their quality of management.
6. Principle of goodwill: success depends a lot on goodwill. So one of the main
objectives of the bank is to create goodwill in market by maintaining secrecy, giving
proper and efficient services, and raising the quality of management.
7. Principle of investment: invested amount, interest rate, terms and conditions etc. fall
under Principle of investment. Bank’s success depends a lot on this principle.
8. Principle of objectives: bank should give loan to its clients by judging their objective.
How they will utilize their loan.
9. Principle of development: bank’s main objective is not only making profit but also
contribute in economic development of a country by running banking activities
smoothly.

Banking System:
Structure of the banking system comprises four types of scheduled bank:

1) Nationalized Commercial bank (NCBs)

2) Private Commercial bank (PCBs)
3) Development Finance Institution(DFIs)
4) Foreign Commercial Bank (FCBs)

Different Modern Banking System:

Based on the organizational characteristics banking system may be classified as follows
1) Branch Banking
2) Unit Banking, which is two types:
a) Chain Banking
b) Holding company/ Group Banking
Based on the techniques banking system may be as follows:
1) Deposit Banking
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2) Investment Banking
Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

3) Merchant Banking
4) Mixed Banking

Branch Banking:
Branch banking is a system where the banking business is carried on by single bank with a
network of branches throughout the length and breadth of the country. The bank will have a head
office in one town and branches in different parts of country. The branch manager in accordance
with the regulations and policies of the head office directs the affairs of the branch. Each bank is
a single entity owned by a group of shareholders and controlled by a group of directors.

Advantages of branch banking:

Economic of large scale operation
Economic of reserve
Quick expansion of branches
Clearing of check make easy
Effective central bank control
Greater stability
Remittance facilities
Enhance profitability

Disadvantage of branch banking:

Lack of effective control
Lack of personal knowledge
Neglect of a particular locality
Create monopoly power
Extra expense
Corruption and fraud
Absence of direct relationship
Taking the liability of other failure
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Unit Banking
Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

In unit banking system, the banking operations are carried through a single office and confined to
a particular area. The bank maintains no branch. Unit bank offers all their services from one
office, through a small number of services (such as taking deposits or casing checks).

Chain banking
Chain banking refers to the system where one ofr few individuals control two or more banking
companies or by the same group of persons through purchase of shares of such banks

Group banking:
Group banking is a system where a group of banks are brought under the control of a holding
company. The holding company controls the affairs of all units in the group. But each bank
maintains a separate identity. The purpose of group banking is to unify the management of
banks. To achieve economics of large –scales operation to grab more power.

The main difference between the two systems is that in case of group banking, the affairs of the
group are controlled by the holding company, whereas in case of chain banking system has more
or less the same advantage and disadvantages of the group banking system.

Deposit Banking:
Pure deposit banking has its origin in England. Banks in England were only confined to
accepting deposits and lending for short periods to industries and trade, receiving deposits and
making advances for short period is called deposit banking. The underlining principle of this
system is that bank cannot lock up their deposit is long run investment, s the deposits are
repayable on demand.

Mixed banking:
The banking system that combines deposit banking with investment banking is known as mixed
banking. The mixed banking receives deposits from public and provides short term, medium
term and long term loan to industries. Mixed banking refers to that banking system under which
the commercial bank make long run loan to industries.
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Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

Investment Bank:
An investment bank is a financial institution that raises capital, trades securities and manages
corporate mergers and acquisitions. Investment banks work for, and profit from, companies and
governments, by raising money through issuing and selling securities in capital markets (both
equity and debt) and insuring bonds (e.g. selling credit default swaps), and providing advice on
transactions such as mergers and acquisitions. A majority of investment banks offer strategic
advisory services for mergers, acquisitions, divestiture or other financial services for clients,
such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity
securities.

The chief distinction between an investment bank and a merchant bank is that a merchant bank
invests its own capital in a client company whereas an investment bank purely distributes (and
trades) the securities of that company in its capital raising role. Both merchant banks and
investment banks provide fee based corporate advisory services including in relation to mergers
and acquisitions.

Classification of Bank:

Bank can be classified on the basis of following

 Function
 Ownership
 Organizational Characteristics
 Origin
 Scheduling

On the basis of Function

On the basis of Function bank can be classified:

1) Central Bank
2) Commercial bank
3) Industrial Bank
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4) Agricultural Bank
 Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

5) Islami Banks
6) Cooperative Bank

1) Central Bank
Like all other countries of world, Bangladesh has also a central bank, namely Bangladesh Bank.
Main function of Bangladesh bank mare: issue notes, regulation of the currency and money,
maintaining value of taka and monitoring and supervision of the bank and non bank financial
institutes.

2) Commercial bank
These banks function primarily as deposit takers and lender to trade and commerce. Commercial
banks accepts deposit withdraw able on demand by cheques or draft etc. They also credit to the
borrower in various forms and conduct foreign exchange business. Ex. Jamuna Bank

3) Industry bank:
Industrial banks are engaged primarily in industry financing through medium and long –term
loanto industrial projects. These banks also perform many activities of the commercial bans
including taking deposit and opening letter of credit etc. Currently two of the govt. industrial
banks are: Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin sangtha (BSRS) in the
nationalized sector.

4) Specialized Bank:
These banks are the banks which concentrate mainly on financing specialized economic and
social activities. Specialized activities may be small and cottage industries financing. Financing
the rural assets less and landless people etc. Ex. Bank of Small Industries and commerce
Bangladesh (BASIC) Limited, Grameen Bank.

5) Agricultural Bank :
These bank are primarily meant for financing agriculture, rural development activities,
Agricultural bank also, in addition to their normal specialized financing activities, do many
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activities of the commercial bank. Presently government owned agricultural bank are:
Bangladesh Krishi Bank(BKB), Rajshi Krishi Unnayan Bank (RAKUB)

6) Bank run on Islamic Principles:

Islami bank do business of banking on the basis of islami sharia or Islamic principles. Example:
Islami Bank Bangladesh Limited

7) Co-operative Bank:
Co-operative banks usally meet the short term credit need of agriculture. These bank are run on
the cooperative principle. Example : Bangladesh Samabay bank.

On the basis of Ownership:

On the basis of Ownership bank can be classified:

1) Fully Government owned or nationalized bank . Ex- Sonali Bank

2) Bank in the private sector- national bank
3) Joint venture bank. Ex. IFIC bang ( government owned about 33% share rest of the
private )

On the basis of Origin:

On the basis of Origin bank can be classified:
1) Local Bank- Owned by local people, Ex: Jamuna bank
2) Foreign Bank- Owned by foreign govt. or foreigner .Ex. Habib bank, State bank of India,

On the basis of Scheduling :

On the basis of Scheduling bank can be classified:

1) Scheduled bank:
Schedule bank has been defined by the Bangladesh bank order-1972. According to article
-2 of this order a schedule bank means: a bank for the time being included in the list of
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maintained under sub clause 1) of clause 2) of article 37.

Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

2) Non schedule Bank:

Any bank not included in this list is a non scheduled bank.

Functions of a Bank:

Micro functions:

1. Receiving deposits: current, savings, fixed deposits

2. allowing interest: on deposits
3. Extension of credit and receiving interest: bank grants short term, mid term, long term
loan. Bank also collects interest from this loan.
4. Creation of credit deposits: after granting loan bank tells its clients to open an account
(current or savings) in that particular bank. Later on bank deposits that loan amount on
that account. In this way bank creates credit deposits.
5. creating medium of exchange: checks, bill of exchange, bank drafts, pay order,
6. giving checks:
7. formation of capital:
8. Issuing notes: issuing different types of notes is one of the major functions of central
bank.
9. Circulation of money: commercial banks help in circulation of money.
10. Act as a trustee: bank often issues bank solvency certificate for its clients. Moreover it
also works as a trustee for its clients.
11. Exchanging negotiable instrument:
Macro Functions:

1. investment of capital:
2. Role in the economic development: industry, business and trade, building house,
transport, communication.
3. Transmission of money: banks send and receive money from one branch to another
branch through checks, bill of exchange, drafts etc.
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4. safe custody of money:

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5. Consultancy: to business organization, individuals or industry.

Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

6. Employment: banks invest in agricultural, industrial or business sector. These things

create job opportunity.
7. Controlling money market: central bank use to control money market with the help of
commercial bank.
8. credit control:
9. agricultural development
10. industrial development
11. To set up relation: banks try to create relationship between local and foreign business
organizations.
12. Regional development: banks open their branch in undeveloped or underdeveloped areas
and give loan in low interest rate or easy terms and condition. These activities of banks
help the economic development of that region.
13. Formation of money market: banks use to form, manage and control money market
according to the prescribed principle.
14. help in import and export:
15. acts as treasurer of the government:
16. Discounting of bill of exchange, bank drafts etc: bank some times discount bills, bank
drafts for their clients. For doing this things bank charge service charge.

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Insurance & Banking: Lecture Sheet-1 (Banking-Introduction)

Importance of bank to the Economic Development:

Importance of bank to the Economic Development

Contribution in Contribution in Contribution in Contribution in

business and agriculture industrial other sectors
trade development

Contribution in Foreign trade

Contribution in internal trade

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